Demand and supply of cereals in India

2010-2025

This paper attempts to project the future supply and demand up to the year 2025 for rice and wheat, the two main cereals cultivated and consumed in India. A review of studies that forecast the supply and demand of Indian agriculture commodities revealed three important limitations of such studies: (a) The forecasts are generally overestimated (in the ex post situation); (b) the methodology is not clearly outlined; (c) ex-ante validation of the forecast have not been carried out. This study presents forecasts based on models that are validated so that forecast performances can be assessed.

In this study, a quadratic almost ideal demand system (QUAIDS), which allows for expenditure shares to rise or fall with rising incomes, has been used to model household demand. The model has been estimated with data on consumption of 11 major agricultural commodities from the 61st Round of the National Sample Survey (NSS) for year 2004–05 (NSSO 2006). Our estimates suggest that the demand elasticity with respect to total food expenditure is negative for rice, wheat, and pulses, which are plausible given the observed fall in the consumption of these commodities on a per capita basis over a fairly long period of time even as income levels rose in the country. Validation of this model with actual values for 2007–08 and 1993–94 from the NSS shows that the forecasts errors are less than 3 percent for the two cereals lending confidence to the model’s forecasting ability for future years. Under different scenarios on income growth, monthly per capita consumption of rice and wheat in 2025 is forecast to decline to 5.5 and 4.1 kgs, respectively, from their 2004–05 levels of 6.1 and 4.4 kgs, respectively. Scaling up these projections with the official forecasts of population from the Government of India and adding the indirect demand to the direct demand gives us the forecasts of the total demand. Total demand of rice and wheat in 2025 is forecasted to be in the range of 104.7–108.6 and 91.4–101.7 million tons, respectively.

Supply of rice and wheat were modeled through two approaches. First, a Cobb-Douglas production functions relating crop output to the price of the crop compared to the price of competing crops and the price of fertilizer, the total area and proportion of irrigated area under the crop, total fertilizer consumption, and annual average rainfall were estimated using national level data over the period 1981–82 through 2007–08. In the second approach, crop output was determined as the product of the total acreage under that crop and its yield, which were modeled separately. Crop acreage was modeled as a function of the relative price of the crop, rainfall and the irrigated crop areas, with irrigation being modeled separately as a function of investment. Crop yields were modeled as a function of the relative price of that crop with its competing crops and the price of fertilizer, proportion of irrigated area under the crop, total fertilizer consumption, and annual average rainfall. Acreage and yield functions were estimated with data for the period 1981–82 to 2007–08. Based on these alternative models, supply of rice and wheat in 2025 is forecasted to be in the range of 135.5–165.6 and 93.6–114.6 million tons, respectively, under different scenarios on investments and fertilizer growth.

These forecasts suggest that under reasonable scenarios on demand and supply, the country is likely to face growing surplus in rice, from 15.5–30.8 million tons in 2015 to 26.9–60.9 million tons in 2025. There will also likely be a surplus of wheat, though some deficit in 2025 cannot be ruled out. The range of surplus for wheat is 5.0–20.4 million tons in 2015, while in 2025 it ranges from a deficit of 8.1 million tons to a surplus of 28.3 million tons. These trends suggest that managing surpluses rather than deficits is likely to be the bigger policy challenge for India in the future, especially in the case of rice.